Republican Antecedent to Regulatory Attacks on Commodity Speculation

The notion that regulators or public deliberation can better anticipate the valuation of commodities than can speculators is wrong for several reasons. First, there is no reason to believe that the public at large, professional economists, politicians or appointed officials are better equipped to value an asset like commodities than are private traders. The information required to do so is specific to time and place and requires the judgment and expertise appropriate to an individual with specific knowledge about commodity markets. This can only be obtained through professional experience.

Second, commodity speculators take considerable risk in investing in commodities and therefore are motivated to make the most accurate predication of future price. In contrast, politicians, appointees and the general public are unaware of the risk associated with a given price prediction. If the commodity speculator is wrong he loses his investment. If the politician is wrong, someone else goes hungry. That is, regulation of commodity prices potentially creates shortages. Such shortages can cause starvation and other forms of deprivation. The economists, experts, politicians and public advocates who clamor for regulation are not the ones who will suffer. Theirs is a special sort of greed and viciousness.

The ability of markets to assess value is unparalleled. Shortages induce increases in price. If speculators irrationally bid up prices, then public demand for the commodity will marginally decline. Depending on the responsiveness or elasticity of the commodity price, a small decline in demand potentially can have a large effect on price. It is not unusual for speculators to lose large fortunes in the commodity field. This would be associated with a price correction.

The power of markets to reassess erroneous price determinations was unknown in the days of the Progressives. Today's social democrats are likewise economically illiterate. It is not surprising that many Republicans, schooled in the Progressive tradition, are, like social democrats, eager to greedily cause shortages that harm the poor.

When Warren G. Harding won the presidency in 1921 he was the first non-progressive president in almost twenty years, since William McKinley. The public had been frustrated by an inflation that occurred following World War I and, as well, by Woodrow Wilson's obsession with the League of Nations. Progressivism was primarily a Republican, not a Democratic, movement. Not all Republicans were Progressives, but a large share of the Republican Party, perhaps half, bolted in 1912 to vote for Theodore Roosevelt, the Progressive Party candidate, enabling Wilson to win. Wilson was a progressive but of a different stripe from Roosevelt. He emphasized individualism, he opposed the minimum wage, he had long been an advocate of the gold standard, and he retained a belief in the producerist philosophy that had informed 19th century Republicans.

Harding was not idelogical and has generally been viewed with skepticism by left wing historians as well as by the Progressives of his day. However, by 1920, after nearly two decades of Progressivism, the assumptions that politicians made were very much in the Progressive tradition. Neither Harding nor Coolidge, who succeeded Harding after his death, had any interest in repealing Progressive legislation such as the Hepburn Act, which established federal price controls on railroads, or the Federal Reserve Bank. Instead, Harding argued for "normalcy". In his riveting book The Politics of Normalcy*, Robert K. Murray describes the 67th Congress, which was Republican, as was Harding, as involving a contest between several special interests for regulatory privilege. The idea of laissez faire had already been forgotten. In its place, farm interests were clamoring for tariffs and farm supports and business interests were clamoring for tax reductions. In addition, there were regional conflicts over regulatory advantage.

One of the laws that the agricultural lobby pushed through early in the Republican Congress (irritating the business lobby, which thought they would get their special interest legislation passed first) was the passage of the Capper-Tincher bill**. The Capper-Tincher bill was passed as the Future Trading Act that:

"...more carefully regulated the grain exchanges by placing a prohibitive tax on speculative transactions involving puts and calls, bids and offers."

Although the politics of the 1920s are thought of as a reassertion of conservatism, it is important to understand that by 1921 Harding no longer thought in terms of the limited government philosophy of the late nineteenth century Mugwumps, Jackson or Jefferson. Rather, Harding's normalcy simply referred to an end to the inflation, radical emphasis on the League of Nations and war-related imbalances that occurred during the Wilson administration. It was no rejection of Progressivism.

Today, we again hear clamor for regulation of freedom of exchange in the name of economic illiteracy. Not surprisingly, the clamor comes from both parties.

*Robert K. Murray, The Politics of Normalcy: Government Theory and Practice in the Harding-Coolidge Era. New York: WW Nortn, 1973.

**Ibid., page 50